Circumstances change. What may have made sense for someone at one time of their life may not make sense at a different time. But what happens if you are a Settlor of a trust who now regrets their decision to place certain assets into the trust. Can you simply ask for the assets back? Does the Settlor have the ability to unilaterally revoke the trust after it is created? Like most legal questions the answer is “it depends”.
Rose v. Rose, 2006 CanLII 20856 (ONSC), offers an excellent insight into the reasons why a Settlor may later regret their decision to place certain assets into a trust, as well as the application of the general principle of whether a Settlor can unilaterally revoke a trust.
Rose v. Rose dealt with the situation in which a trust was settled into which the Settlor transferred ownership of the family cottage and ski chalet. The Settlors two daughters were the beneficiaries of the trust. Following the establishment all family members continued to use the cottage and ski chalet much as they had before the trust was created. In the context of a later divorce proceeding between the Settlor and his then wife, the beneficiaries moved to enforce certain rights regarding the cottage and ski chalet. The Settlor objected, and moved to have the trust rescinded, and the cottage and ski chalet transferred back to him. The court refused the Settlor’s request, ruling that as the trust deed did not contain a power of revocation it could not be unilaterally revoked by the Settlor. In succinctly summarizing the issue, the court states:
“Once a Trust is created, the settlor cannot retrieve any part of the Trust assets unless he retained a power of revocation when he created the Trust.”
If a trust cannot be revoked by the Settlor unless they retain a power of revocation, surely most trust deeds would contain a power of revocation, as it would presumably be better for the Settlor to have a power they never use than later want to revoke a trust but not have the power to do so. Although such logic may stand in isolation, in reality it is more complicated, as there can be significant tax consequences to the Settlor by retaining a power to revoke. Such tax consequences are caused by the “reattribution” rules of section 75(2) of the Income Tax Act, which can attribute income which is earned in a trust to the Settlor if the Settlor retains the ability to have trust property revert back to them. As a result of these potential punitive tax consequences for the Settlor by retaining a power of revocation, the real word reality is that a trust deed which contains an express power for the Settlor to revoke the trust is less common than it may otherwise be.
Thank you for reading.